Barriers To Adoption Of Renewable Energy Technology

technology, investment by the private sector will be viewed as too risky; therefore, thegovernment will need to subsidize both research and development costs and installation costs.Because of rising costs in the raw material silicon, producers of solar panels are facingsimilar production cost increases as in the wind industry. Solar panel manufactures now demandmore silicon than the computer chip industry. This has produced a shortage of silicon driving theprice up from 35 per kilogram to the current market price of 100 per kilogram.The largest producer of renewable electricity in the U.S. is biomass, which producesmore electricity than wind, solar, and geothermal combined. Electricity is generated usingbiomass by burning plant or waste material, or collecting and burning landfill gas. The largestbiomass producers in the U.S. are not utilities but private-companies that utilize forest materialsto produce lumber or paper products.Biomass plants are usually much smaller than fossil-fuel power plants, where a typicalbiomass plant may have a 50 MW capacity compared to the 500 MW capacity of a fossil-fuelpower plant. The small scale of these plants make the initial investment in equipment higher inrelation to the amount of power produced. The current per kWh costs for biomass isapproximately 10 cents. This cost is expected to decrease as more firms attempt to utilize theirwaste materials to produce electricity instead of sending that material to landfills. The CaliforniaBiomass Collaborative estimated that 30 million tons of waste material could be used to produce2,500 MW of electricity, which is the equivalent of five average sized fossil-fuel plants.The renewable energy source that has the most unrealized production capacity isgeothermal energy, which uses the heat trapped in the Earth to generate electricity. Thetraditional method used is to drill into the ground and capture the steam and heated water that hasbeen trapped underground to spin the turbines to generate electricity. The biggest challenge is-9-

the need to properly balance the amount of water taken out with the amount that is put back in.There is high variability in geothermal sites depending on such factors as the size of thegeothermal field, water pressure, temperature, and how quickly the field can reheat and releasewater.In the U.S. as of 2006 installed geothermal energy capacity is about 3,000 MW, with thelargest geothermal production field located in California, with an installed capacity of 725 MW.The production costs of geothermal energy currently range from 6 to 10 cents a kWh. A studyby MIT estimated that 10% of the electricity in the U.S. could be produced using geothermaltechnology by 2050. However, for geothermal technology to become competitive with fossilfuel based technology the government will need to create supportive policy initiatives, such asgovernment loan guarantees, production tax credits, accelerated depreciation, and depletionallowances.III. U.S. Renewable Energy Policy DesignsThe U.S. has used numerous policy designs over the last thirty years to promoterenewable energy, which have included financial incentives, regulatory measures, and researchand development programs. The energy policies in the U.S. are a product of both individualstate and Federal policies. This section of the paper will examine the different policies utilizedin the U.S. and the success of those programs on increasing the usage of renewables.One of the most important Federal policies enacted to promote the usage of renewableshas been the Production Tax Credit (PTC), which allows investors to use the tax credit to writeoff their investment in qualifying renewable technology against other investments they havemade. The PTC was first enacted with the EPACT of 1992, which established a 10-year 1.5- 10 -

cents per kWh inflation adjusted PTC for private and investor-owned wind projects and closedloop biomass plants brought online between 1994 and 1999. The current PTC has beenexpanded to include solar and geothermal technologies. However, from 2000 to 2004 the PTCwas allowed to expire on three separate occasions. The effects of the three separate PTCexpirations on installation of new wind capacity are easily evident in Figure 4. The “onagain/off-again” status that has been experienced with the PTC has created a boom-bust cycle inthe wind industry. The wind industry experiences strong growth in installed capacity during theperiod before the PTC expires, and when the PTC expires there is a sizeable decrease in thenumber of wind projects.Figure 4. U.S. Wind Power Capacity Additions, 1999-20068The PTC was set to expire again at the end of 2007, but Congress recently passedlegislation to extend the credit through the end of 2008. The extension will allow the windindustry to continue with its record of strong growth; however, the extension does not allow forsustainable long-term growth in renewable technologies. A wind farm project can take more8Source: Energy Information Administration- 11 -

than two years to complete, and an investor who depends on the PTC to make a project morecost effective is less likely to take the risk if they are unsure that the PTC will still be availablewhen the project is completed. Also, the wind and solar industries are currently experiencingshortages in available wind turbines and solar panels, which mean that there is a demand forincreased manufacturing capacity. However, investors are less likely to make the huge capitalinvestments necessary to increase capacity without a guarantee that there will be consistent longterm demand for their products. The policymakers need to enact a long-term PTC extension tomaximize the long-term growth of renewable technologies.At the state level the key policy used to increase the usage of renewable energytechnologies has been Renewable Portfolio Standards (RPS). RPS require that a certainpercentage of a utility’s overall or new generation capacity or energy sales must be attained fromrenewable resources. RPS requirements generally increase over time and utilities mustdemonstrate compliance to the regulatory body on an annual basis, where utilities that fail tomeet their renewable purchases could be fined by the government. Since RPS set fixed numerictargets for renewable energy but allows suppliers flexibility in how to meet those targets, it isexpected that properly designed RPS will create strong cost reduction incentives.One key element in the RPS is the use of Renewable Energy Credits (REC), which istradable certificate that is proof that one kWh of electricity has been generated by a renewableresource. The RPS requires that electricity generators show they have meet their renewableenergy obligation by purchasing a certain number of REC. For example, if the RPS is set at 5%,and a generator sells 100,000 kWh in a year, the generator would need to purchase 5,000 REC.Currently 22 states and the District of Columbia have enacted RPS; a summary of allprograms is available in the appendix. For example the RPS in Illinois voluntarily encourages- 12 -

that in 2007 2% of electric energy sales are met with renewable energy and increases to 8% by2012. The state of California has enacted the most ambitious RPS, which calls for the state’sinvestor-owned utilities, energy service providers, and community choice aggregators to meet20% of their electricity load with renewable energy resources by 2010. This represents anincrease of 8,000 MW of new renewable capacity. California currently receives about 12% oftheir electricity from renewable resources.The advantage of RPS over the direct subsidy approach is that it avoids the process ofgovernment bodies having to decide how to distribute funds, which can be highly inefficient andbureaucratic. The only government involvement necessary once the RPS is set is to certify REC,monitor compliance, and impose penalties when necessary. The optimal level of the penaltyneeds to be several times the cost of purchasing REC to assure that generators comply with theRPS.A properly designed RPS will create certainty and stability in the renewables market byallowing the renewable power industry to enter into long-term contracts and lessen the cost offinancing, which will also lead to the reduction in renewable energy costs. The flexibility of theRPS allows generators to comply at the least cost. A generator can compare the cost of owning arenewables facility to the cost of purchasing REC to determine how they meet the RPS.Therefore, those who can efficiently generate renewable power will and those who cannotefficiently produce it will purchase REC on the competitive market.Another efficiency advantage of the RPS approach is that generation companies will belooking to improve their competitiveness in the market, which means that they will have aninterest in reducing the costs of renewables so that the costs of complying with the RPS will alsobe reduced. To accomplish cost reduction a company might provide financing to a renewable- 13 -

project, seek out the least-cost renewable resources, or enter into long-term purchasingagreements. All of these cost reduction methods will create a competitive environment forrenewable technologies that cannot be achieved by direct subsidies.Section IV. Global Trends in Renewable Energy TechnologySince the energy crisis of the 1970s, many countries have become interested indeveloping renewable energy technology for generation of electricity; the main motivationbehind increasing their usage of renewables was to reduce their dependence on imports of fossilfuels. However, in the 1980s and 1990s countries renewed their interest in developingrenewables as a way to deal with environmental issues. This section of the paper examines thestate of renewables and the type of policies initiated in Denmark, Germany, the Netherlands, andJapan.The three European countries and Japan were chosen because each country has hadsignificant success in implementing renewable energy technology and an examination of theirpolicies is important to determine what type of policy structure creates growth in the renewableenergy sector. One item that needs to be mentioned when comparing the size of the renewableenergy sector in each of these countries with the United States is that the average electricityprices in each of these countries is higher than in the U.S., which would reduce the pricepremium on renewables and increase the likelihood of their implementation.The country with the largest percentage of their electricity generated by non-hydrorenewables is Denmark, where in 2003 21% of their electricity was generated by wind power.From 1996 to 2001 Denmark experienced 30% annual growth in installed wind capacity. TheDanish government with their Energy 21 program has set a goal of increasing wind capacity to- 14 -

5,500 MW by 2030, which would represent 50% of total electricity demand in 2030. Thepolicies enacted by the Danish government over the last thirty years have succeeded inincreasing both the capacity and market share of renewable energy. (See Appendix Fig. 7)In 1979 the government began offering an investment subsidy of up to 30% of the cost ofwind turbines and solar panels. This investment subsidy went directly to reimbursing a fixedpercentage of the costs of the investment, where in the U.S. the investment subsidy is actually aninvestment tax credit. A direct investment subsidy instead of an investment tax credit means thatinvestors develop renewable energy projects to promote renewable energy instead of attemptingto reduce their tax burden.The key to the consistent yearly growth of the wind industry in Denmark has been thatthe production subsidy has remained the same. This has provided investors with the necessaryincentives to invest in the manufacturing of wind turbine and turbine components, which has ledto all wind capacity installed in Demark to be manufactured by domestic companies. Danishcompanies also provide a significant percentage of the global supply of wind turbines, and in2003 they supplied 32% of all installed capacity globally. The U.S. on the other hand has reliedon a Production Tax Credit (PTC), which has to be periodically renewed by Congress. This hascaused the installation of wind capacity in the U.S. to have large fluctuations depending on thePTC. During periods when there is a PTC the installed wind capacity in the U.S. increasesgreatly; however, when the PTC expires there is essentially zero wind capacity installed. Theinconsistency of the PTC has not given investors the guarantees needed to make investments inthe manufacturing of wind energy components.The development of wind energy projects in Denmark has also not faced the same levelof local opposition that projects in the U.S. has, and in particular Illinois. The main reason is that- 15 -

the wind industry in Demark has developed with a system of cooperative ownership of turbines,where farmers and landowners are given an ownership interest in projects. Individuals or localcooperatives own about two-thirds of the wind turbines in Denmark, which has reduced localopposition and given voters a vested interest in the wind industry.Germany, which is the largest economy in Europe, has the most installed wind capacityof any country in the world, which increased from 12 GW in 2002 to 14.5 GW in 2003. In partsof Germany wind energy represents 20% of the power supplied; however, the overall supply ofrenewables in Germany is about 5%. The German government has also been active in promotingthe use of solar energy, and in 1999 passed the 100,000 Solar Roofs Program. The programprovides low-interest loans for photovoltaic systems, and this program has increased installedcapacity of PV systems from 50 MW in 1997 to 400 MW by 2003.There have been two main policies enacted in Germany that have led to the sizableincrease in renewables: the Electricity Feed-In Law (1991) and the Renewable Energy Law(2000). (See Appendix Fig. 5) The Electricity Feed-In Law changed the market structure forrenewable electricity producers by requiring utilities to purchase renewable electricity andstating the price that this electricity would be purchased at from producers. The utilities wererequired to pay renewable producers 90% of the retail rate for electricity. The passing of this lawdid two important things for producers of renewable electricity: created a market for renewableelectricity, and provided a high enough price to guarantee being able to recover their initialcapital investment.The Electricity Feed-In Law (EFIL) is similar to the Public Utilities Regulatory PoliciesAct (PURPA) passed by the U.S. in 1978. PURPA required utilities to purchase electricity fromproducers using renewable energy sources at a price not higher than their “avoided costs” of not- 16 -

having to produce that power themselves, where the level of avoided costs was set at the statelevel. The main difference between PURPA and the German law is that in the U.S. thecalculations of “avoided cost” were lower and closer to market wholesale rates than the higherretail rate used in Germany, which allowed new renewable technologies to become competitivefaster. Another difference between the two laws has to do with their initial goals, where PURPAwas designed to promote energy efficiency the German law was developed to increase the usageof renewable resources. Another reason PURPA might not have had the same effect as EFIL isdue to when the policies were enacted. The wind industry was more developed in terms oftechnology and costs in 1992 when the EFIL was passed than in 1978 when PURPA was passed.The U.S. did not experience the level of growth in wind energy that Germany did until additionalincentives were enacted, such as the PTC in 1992.The Renewable Energy Law (REL) enacted by Germany in 2000 has also contributed to asignificant growth in the usage of renewable sources of electricity. The REL set fixed prices thatrenewable power producers received for each type of renewable energy source. The structure ofthis law allowed purchase prices to be tailored to each type of renewable resource providing thenecessary support for further growth, since each technology faces different costs of generation.The Netherlands as of 2004 generated about 8% of their electricity from non-hydrorenewables. The Netherlands get a greater percentage of its renewable electricity from biomassand waste incineration than any other country in Europe. Biomass and waste incinerationaccount for 67% of renewable electricity, while wind makes-up 24% and solar less than 1%. TheNetherlands has relied on a more voluntary approach to increasing the usage of renewables,which is different than the route taken by Denmark and Germany. (See Appendix Fig. 9)- 17 -

The Netherlands in 2000 enacted the Demand-Pull Ecotax System that is unlike anypolicy currently used in the United States. This law uses a demand-pull approach byencouraging consumers to purchase renewable electricity, which is in contrast to the supply-pushpolicies in the U.S., such as support for R&D (Federal) and Renewable Portfolio Standards(State). The Ecotax has two components: producers receive a production subsidy, andhouseholds are exempt from the Ecotax for all electricity purchased from renewable electricityproducers. The combination of these two incentives has allowed power from renewableresources to be cheaper than power from fossil fuel sources for households in certain parts of theNetherlands. The demand by households for electricity from renewable resources has increasedfrom a few thousand households in 1998 to more than a million in 2002. The demand forelectricity from renewable resources has been so great that it has outstripped supply, which hascaused the Netherlands to have to import renewable power since 2000.Japan currently only generates 2% of their electricity from non-hydro renewables, but itis one of the only countries that have had success in developing a market for photovoltaic (PV)technology. (See Appendix Fig. 11) In 1992 Japan had PV installed capacity of only 19 MW butby 2004 installed capacity increased to 2,000 MW.The growth in PV capacity can be attributed to four policies enacted by the Japanesegovernment from 1992 to 1994. First, the go

Renewable energy first gained the interest of policymakers in the 1970s and early 1980s, but interest faded due to falling fuel prices and abundant supply. Currently the market for renewable energy technologies is experiencing rapid growth, which is due to such factors as high fuel prices, improvements in renewable energy technologies, and .